Republican plans to pass a huge new tax cut in the early days of newly elected President Donald Trump’s second term are facing a major obstacle: the price tag.
According to the Congressional Budget Office, the legislature’s nonpartisan bookkeeper, extending Trump’s 2017 tax law would increase the national debt by $4.6 trillion over the next decade. But now some leading Republican Party tax writers argue that expanding the law would not increase the nation’s $36.2 trillion deficit at all.
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Their proposal, while mysterious, is about more than accounting.
In 2017, Trump’s Tax Cuts and Jobs Act lowered rates for businesses and individuals in every income bracket, although the benefits were concentrated among the highest earners. The corporate tax cuts are already permanent, but the individual cuts expire at the end of this year, meaning most Americans will face a major tax increase next year unless Congress passes new legislation. Trump also promised new policies during the campaign, including ending federal taxes on tips and overtime.
Using a process called “budget reconciliation,” the Republican Party could avoid a Democratic filibuster in the Senate. But for that to work, Republicans — who will govern by narrow margins in both chambers of Congress — must agree on how much they are willing to add to the national debt.
That makes the stakes pretty high for the internal Republican dispute over the price of the tax cuts — which could determine how aggressive Trump and the GOP will be in pushing for new tax cuts and spending cuts.
Some fiscal conservatives are already expressing concerns about adding trillions more in red ink to the nation’s books, and they want to use the tax bill to codify the GOP campaign’s promises to cut government spending.
The House of Representatives is generally much more sensitive on budget matters than the Senate, and the Republican majority in the House of Representatives is filled with deficit watchdogs who have a reputation for undermining even Trump’s priorities if they are too expensive. The Senate is eager to secure an early victory for the new president, with fewer concerns about costs.
“You have to pass one [budget] resolution eventually. We kind of have to agree with it,” said Sen. Josh Hawley (R-Missouri). “And I just hope that I’ve said this to my leadership and we need to get on with it. I don’t know how much value there is in a prolonged standoff between the House of Representatives and the Senate.”
Normally, lawmakers would look for cuts to make up for lost revenue by expanding cuts. House Budget Committee Chairman Jodey Arrington (R-Texas) discussed a “menu” of budget policy choices at a Republican Party policy luncheon last week. Options included sharp cuts to food stamp programs, limiting Medicare payments and rolling back President Joe Biden’s climate investments, among other policies.
“If we unleash this economy, through tax cuts, deregulation and smart energy policies, while bending the mandatory spending curve by trillions of dollars, it will be more than we have ever done to restore this country’s fiscal health. in the history of this nation,” Arrington said.
But some of those changes would be politically explosive. So leading Republican Party tax writers are considering another strategy that they hope will put the tax bill on a glide path.
Because the tax cuts are already in effect, some Republicans argue that a new bill to extend them would not impose additional costs on the U.S. Treasury Department. It is, they say, analogous to renewing a Netflix subscription: the costs increase month after month, and many consumers wouldn’t consider the recurring payment as a new expense.
“It recognizes reality,” said Senate Finance Committee Chairman Mike Crapo (R-Idaho), the leading proponent of the approach, which is called a “current policy” baseline.
The more conventional approach to budget estimates for the next ten years is to use the “current law” baseline. Under current law, federal revenues are expected to rise significantly next year when the tax cuts expire. So a bill to expand tax cuts would deprive the Treasury of that big burst of new revenue.
“I view the current policy premise as a made-up term – made up to avoid the difficulty of budget impact,” said Rep. David Schweikert (R-Arizona), chairman of the bicameral Joint Economic Committee, which oversees economic policy .
There is recent precedent for using a current policy baseline. In 2013, Jeff Zients, then a top budget official in the Obama administration, argued that Congress should use that benchmark when extending the George W. Bush-era tax cuts. Zients, now Biden’s chief of staff, said he preferred that premise “because it measures change from the status quo.”
But budget experts largely reject that framework. Even as policymakers push for the federal government to reduce its borrowing based on current policies, U.S. creditors don’t see it that way, said Maya MacGuineas, chair of the nonpartisan Committee for a Responsible Federal Budget. Bond buyers will demand higher interest rates as compensation for taking on a riskier investment.
“Even if we say we won’t lend, we still have to go ahead and lend the money, and someone has to be willing to lend it to us,” MacGuineas said. “And right now, concerns about our enormous and growing debt burdens could make that very risky for the economy as a whole.”
Arrington, who as chairman of the Budget Committee will have enormous influence on the reconciliation process, said that even if Crapo’s favored “current policy” premise were adopted, a tax law that is not accompanied by other fiscal policies would still actually increase the national debt — even if it is not reflected in the spreadsheets.
“I don’t get caught up in the CBO accounting,” Arrington said. “What I get caught up in is any real impact on the budget deficit and what we need to do to mitigate that. No matter how you do it, even based on current policies, the budget deficit will still have a negative impact.”
Whatever the cost, Republicans are eager to get started.
“We cannot keep families and small businesses waiting for Congress to do the right thing and provide tax relief at the eleventh hour. We need to make Trump’s tax cuts permanent as soon as possible,” House Ways and Means Committee Chairman Jason T. Smith (R-Missouri) said during a hearing Tuesday.
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